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The Earl of Kintore: My Lords, in my valedictory speech in this House--a place that I shall miss a great deal--I do not intend to re-rehearse the points that were well made in a rather late short debate in the other place last Wednesday (at cols. 404-429 of the Official Report) as to why Clause 70 should stay removed from the Bill. When the House divided at midnight the Government insisted that Clause 70 should be reinstated, despite the fact that at the very least it appears to discriminate against smaller contracting businesses.

At a meeting of about 240 professional contractors in Aberdeen in July, and a similar number in the Jubilee Room last Wednesday, there seemed to be feelings of anger and bewilderment: anger that running one's affairs through a long-established personal service company is now regarded almost as an illegal activity; and bewilderment that a perfectly sensible, popular, preferred, flexible, and in some cases necessary method of working as contractors is under attack. If there is large-scale fraud as regards the National Insurance Fund, I am sure that there is all-party support in this House to help the Government to stop it. A figure of £200 million was given, but doubts have been expressed about its accuracy.

The aspect that alarms me most about the situation is that in order to catch a few wrongdoers there is ready acceptance that many perfectly legitimate contracting businesses will have to close down if they cannot change their method of working or absorb the competitive pressures from larger, favoured organisations.

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I realise that this provision has had to be accommodated in a large, complex and important Bill. But Clause 70 is important to those whom it affects. I make a plea that in a similar future situation adequate parliamentary time will be allowed, away from the Bill, in both Houses, and that there should be genuine pre-legislative consultation with established pressure groups such as the Professional Contractors Group. The group continues to have real concerns about the practical application of Clause 70 and has suggestions for better ways of achieving the Government's objective. Here I should declare an interest in the Professional Contractors Group. The group intends to give me a hugely expensive dinner this coming Wednesday. I believe that fish is to be the main course.

During my journey back to Scotland on Friday after our sadly curtailed Sitting, I read an article in the Evening Standard of which I should like to quote the first sentence:

    "Shortly after becoming Chancellor of the Exchequer, Gordon Brown decided to find out why there are so few entrepreneurs in Britain".

I think I can now assist the right honourable gentleman. The threat of IR35 being enacted has already caused a trickle of entrepreneurs to go abroad. If the provision is enacted as Clause 70, there is a danger of the trickle becoming a flood. If the seven or eight contractors--young, smart, articulate and interested--who were listening to the debate with me in another place last Wednesday are a representative sample of the group, we should be fighting tooth and nail to keep them in this country, and not treat them like unwanted raffle prizes.

The Minister will probably tell me, as usual, that I am talking rubbish. I shall not try to embarrass the noble Lord; however, I earnestly hope that on this occasion he is correct and I am wrong.

Lord Jenkin of Roding: My Lords, I shall not detain the House long as I have deployed the arguments at previous stages: we debated this point in Committee, on Report and at Third Reading. I am deeply disappointed that the Government have decided to bring these clauses back to the House at this stage.

I have tried to read and understand the debate in the other place. I must say that it was an extremely scrappy debate. The knowledge that it would be guillotined encouraged people to intervene at every stage. Like the noble Earl, Lord Kintore, I find it difficult to see the justification for taking this measure through in such a blunderbuss fashion.

No one on this side of the House has denied that there is a problem with the Friday to Monday transition, as the noble Lord, Lord McIntosh, has asserted. But there is absolutely no doubt that this and the succeeding clause will hit a large number of perfectly reputable self-employed people, who will find themselves having to pay not merely the self-employed tax but both the employer's tax and the employee's contribution. In a very competitive industry that kind of thing can make a difference.

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We have talked a good deal about people in the IT contracting industry. I do not know whether even now the Minister realises the scale of the attack that this clause represents. Recently, I received a letter from Mr P J Street who works as a consultant in the railway industry. He writes:

    "Until recently I was in full time, salaried employment, but I resigned and set up my own company. This, I hasten to add, was so that I would obtain more variety and job satisfaction (I'm no longer working for my original employer). As you rightly pointed out"--

he refers to my speech at Third Reading--

    "the effect of Clauses 71 and 72",

as the matter stood then,

    "will be simply to saddle me with an excessive tax liability because I will have to fund both employee's and employer's NIC. I work in the railway industry ...

    Unlike a permanent employee I have no continuity of employment. The client doesn't fund a pension scheme, sick pay scheme, holidays, etc, and if I want a perk, such as a mobile phone, I have to fund it myself".

Is it really the intention of the Government to hit people like that--because that is what they are doing? I fear that, as the noble Earl said, some people will simply pack up and go abroad because they feel that they are being unjustly penalised and will be unable to compete under the burden. That is a great shame.

We are told in the press, given the usual leaks, that there will be all kinds of splendid bonuses for people to engage in share option schemes and so on. What the Government give with one hand they take away with another. I believe that it is a great shame.

7 p.m.

Lord Higgins: My Lords, I understand that we are to have just one debate on IR35. It is perhaps appropriate for me to comment at this stage, although the noble Lord, Lord Goodhart, concentrated on the specific amendments that are before us. First, I pay tribute to the noble Earl, Lord Kintore, who has been assiduous in pursuing the arguments on this point with considerable skill. It is sad that, as I understand it, in a short time he will no longer be with us. One cannot help but ask whether those who come after him will be of the same quality that we have seen from his speeches on this amendment. I believe that he has represented the interests to which he has spoken with considerable skill.

We conduct this debate following a further spin session on the way in which the Government are to encourage entrepreneurs. As with the welfare reform side, I believe that we must look carefully at the way in which the Government say one thing in public relations terms and do something quite different. We have seen that illustrated clearly in the case of this clause. We on this side of the House have made it abundantly clear that we do not favour tax avoidance, but we genuinely believe that as a result of the measures that are now before us a considerable number of people, who are perfectly genuine entrepreneurs, will find themselves paying a substantial amount in tax and national insurance contributions. We have yet to see the particular tax

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proposals. However, this is another stealth tax. It is no good the noble Lord raising his eyebrows. Unless we can together find a reasonable solution it will have the effect of discouraging industry and lead to it going abroad, as well as other unfortunate consequences.

I had not realised until I read Hansard in another place that this was yet another "Yes, Minister" case. We discovered in relation to the previous set of amendments that the Government's new proposals to deal with the disabled were put to the previous government and turned down. They have re-emerged with this Government. I understand that this is a somewhat similar situation. The Revenue proposed this measure to the previous government, who turned it down, and now it emerges again. Alas, with the bar on documents proceeding from one government to that of another party we shall never know.

Lord Jenkin of Roding: My Lords, perhaps my noble friend will give way. He may recollect that when I first debated this matter at the early stages of the Bill I said that they tried it out on me when I was Secretary of State for Social Services in 1979. I turned it down.

Lord Higgins: My Lords, it has taken a long while to surface. I recall it well. I also recall that, quite apart from the merits, when my noble friend and I were both at the Treasury, the Inland Revenue and HM Customs and Excise customarily came along with a list of 20 or 30 so-called anti-avoidance proposals. Generally, we agreed that each could have two and that would be it. Be that as it may, it is crucial that further consultations should take place.

I should like to quote an observation by Mr Timms in the other place:

    "The proposals ... have been widely welcomed, not least by the Chartered Institute of Taxation and the Professional Contractors Group".--[Official Report, Commons; 3/11/99, col. 428.]

My understanding is that that is not so. The group does not welcome what is now proposed.

Following the original insertion of this clause in the Bill and its translation to your Lordships' House, a considerable amount of consultation took place but largely with bodies such as the Law Society, to which the noble Lord, Lord Goodhart, referred, and other organisations of that kind. As a result, significant changes were made. The government amendments now before us are very different from those originally tabled. I am happy to say that the so-called control test has gone, certification has been dropped and so on.

What is now before us is certainly better than what we had before, but the fact is that that is largely as a result of consultations with those major professional bodies, not those most affected. I hope that this evening we shall have an undertaking from the Minister that the Government will carry out a further round of consultation with those people who are affected. A large number of them came to the House the other day to make representations to various people, including their own Members of Parliament.

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That is of great importance if the proposal is to proceed in a reasonable form and is not to have the undesirable effects that we have already debated.

The central point is the Government's proposals in regard to the question of costs. The essence of the problem is that as far as concerns this group of people, what is proposed to be taxed and to be subject to national insurance contributions and so on is the total revenue of the operation. If it is a normal plc that is not so: the revenue is divided up into its component parts and so on. But as the clauses now appear before us the new rules will allow personal pensions for the individuals concerned from expenses allowed to employees under Schedule E rules to 5 per cent of the gross fees to cover running costs. But they do not cover a considerable number of other costs, for example salaries paid to support staff, most training and in particular capital equipment. The whole amount of the revenue is classified as income. That has a serious effect on those companies. That is clearly wrong if we are to have a level playing field between the large and small companies operating in this area. I cannot believe that it is in the interests of the economy as a whole to discriminate in that way so that only large companies find themselves able to expand the business, to invest, and so on. The Government have not recognised a serious problem.

Before the provision comes forward in the finance Bill, the Government should carry out a series of further consultations. I pay tribute to the noble Lord, Lord McIntosh, who arranged a suitable meeting for those concerned in this House. None the less, we have a long way to go before the clauses are in a satisfactory form. I understand that there are provisions in the Bill for the Treasury, and other orders, to alter the provisions. If that is so, we can put right what we are unable to do now. It is too difficult to try to form specific amendments which we could have sought to force on the Government today. I do not propose that my noble friends should vote against the proposals before us. However, I express the hope that the issues will be further considered and a sensible solution to the problem found.

7.15 p.m.

Lord McIntosh of Haringey: My Lords, two sets of congratulations are due. The first is to the noble Lord, Lord Goodhart. He has become more radical and antagonistic to the provisions as the Bill has proceeded through the House. The noble Lord will remember that when the matter first arose, he was concerned only with the definition of self-employment. He objected to the control test rather than the existing test. He argued that if the amendment were accepted or passed, his Benches would support the clause. We did what he wanted; and he has gone to the next issue.

The next issue was to oppose the whole clause on the grounds that we have heard; I shall not repeat them. Now he agrees with almost all the clause but appears to oppose the basis on which national insurance contributions are calculated and charged. The noble Lord is a true radical and deserves praise for that, if not for consistency.

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The second congratulations are due to the Professional Contractors Group. I have never encountered such a literate, persuasive series of letters. Ministers have had something like 2,000 letters. I have received many dozens. The noble Lord, Lord Jenkin, has received a number. They are literate, well spelt, well argued, persuasive letters--and wrong. A great deal of parliamentary time has been taken up because a number of people have gathered together, put aside a certain amount of money for lobbying, and persuaded a number of noble Lords opposite of a view of this legislation which is utterly misguided and misconceived. They deserve credit for it; that is the way lobbying works; that is the way politics work. That is what we have to respond to; and I have been responding to it.

However, I shall not go over the wider argument on the clause. The amendments before us from the noble Lord, Lord Goodhart, are on one specific aspect: whether the client of the worker is responsible for deciding whether the new rules apply to a contract and is liable to pay employers' national insurance contributions if they do.

The Motions numbered 53W and 54W would have the effect of reverting to the original proposal, and place liability on the client for any NIC liability incurred by a worker hired through a service company. One of the most unpopular features of our original proposals in the very widespread consultation we carried out--I shall not repeat the figures--was the proposal to do just what the noble Lord proposes. As a result of the consultation, we listened to what people said. We were persuaded that it would have the effect of putting an end to a mechanism which provided valuable flexibility in the market for skilled workers. Most people have welcomed the changes we have made which allow that flexibility to continue while at the same time ensuring that the right amount of tax is paid.

Before I turn to the arguments put forward by the noble Lord, Lord Goodhart, it is necessary for me to quote from the response of the Professional Contractors Group to the press release of 23rd September. It said, first, that the removal of registration is to be welcomed; it would have been an administrative burden. That we did, and it is not in contest.

Secondly, the group said that the move from a single test of supervision, direction and control is to be welcomed. That we have done; it has not been contested.

Thirdly, on the transfer of a responsibility for accounting for tax and NIC from the client to the service company, it said that it is "very welcome indeed". That is not much support for the arguments put forward by noble Lords opposite.

Four points have been argued in the debate. First, it is easier for the client than the worker to bear the risk of having to pay the employer's NICs in particular where the client is a substantial company with a number of short-term contract workers. That implies that larger companies are not as concerned about

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profit margins as smaller companies--which I contest. But it surely does not reflect the reality of the business world: that businesses of all sizes compete. On the contrary, the onus for calculating any secondary and primary Class 1 contributions is best placed with the service company. The worker will build up a knowledge through his previous contracts, and possibly his concurrent contracts, about what working circumstances lead to a NIC liability.

Secondly, it has been argued that where there is liability as to whether the provision was applicable, it is plainly easier for the client than the worker to get legal advice and to form a judgment on the degree of risk. But that ignores the fact that the service companies will have access to advice from the Inland Revenue on whether a contract is caught by the provision. In addition, they will have a right of appeal if they are not happy with the decision. We should not forget that the original proposals would have introduced a new test--to decide whether the provision is applicable to a contract--which has now been withdrawn.

There is a wealth of experience in the private sector and the Inland Revenue in applying these rules. A borderline test will be clear to contributors as being just that: one on which advice should be sought. I do not believe that such advice cannot be obtained by service companies.

Thirdly, there is concern that if there is a dispute with the Inland Revenue, it is easier for a client than for a worker to fight it. That may be true for elaborate avoidance vehicles dreamed up by City lawyers. But the provision is simply to ensure that where a worker would be the employed earner of the client but for the service company, they should pay NICs on relevant contracts. It is a simple concept which has a right of appeal when there is disagreement.

Finally, there is concern that our proposals will increase the pressure on workers to form service companies; in other words, as the noble Lord, Lord Goodhart, said, that clients will refuse to contract with workers who do not have service companies. I hope that I explained from my experience of nearly 30 years that that is not in practice the case. It is not the way the system works. The cost to the client should be the same whether he hires an employee or a service company. The worker will seek to pass on the NIC cost to the service company in the cost that he charges to the clients. The decision is tax and NICs neutral.

I shall not go back on the existing definitions of employment. However, I wish to respond to the noble Lord, Lord Higgins, about consultation with the Professional Contractors Group. I assure the noble Lord that we are consulting the Professional Contractors Group on guidance for its members so that the proposals can be made as clear as possible.

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